The grass is greener in the Land of the Long White Cloud

New Zealand is a land of moderate weather, politics and economic policy. Growth prospects for the New Zealand stock market this year are also moderately good.

Kia-Ora!

When you enter New Zealand the passport check is accomplished by robots – but getting through the bio-security channel is lengthy and troublesome. If you have so much as an Australian peanut in your hand luggage, you’re in trouble. You meet a designated officer who tells you solemnly how grave your fate may be if you have secreted an apple on your person. After a sobering interrogation you are waved through into the beautiful Land of the Long White Cloud (as the indigenous Maori population still call this amazing country).

This is, of course, significant. New Zealand is – and regards itself – as first and foremost an agricultural nation. Since the days of the British Empire, New Zealanders believe that their gift to the world is their food production. They were a larder to the UK for over 100 years until the seventh decade of the 20^th century. Then the Mother Country turned her back on her daughter and began to gorge on Normandy butter and gorgonzola. Now, New Zealand is a larder to friendly neighbour Australia, to Japan and to ravenous, all-consuming China.


You don’t need me to tell you how lush the grass is here; how tender is the lamb; how flavoursome the butter; how aromatic the honey…And the incredible quality and variety of their wine…Everybody knows this already. (By the way, even the coffee tastes better than in Australia – though maybe that is something to do with the water – even hotel tap water tastes like high-end mineral water.)

But this agriculture-first mentality has restricted New Zealand’s ambitions to win out in manufacturing. In fact, there is minimal manufacturing in this isolated country – not even agricultural machinery. If the bedrock of Australia’s prosperity is mining, New Zealand’s is agriculture. The New Zealand stock exchange, the NZX, must be the first one I’ve ever analysed the fluctuations of which are correlated with the price of dairy products.

Race and politics

The politicians here – as in Australia – have embraced globalisation. But if Australia is quasi-American on welfare, New Zealand has a fully paid-up welfare state. The health system here in New Zealand is akin to that of the UK; Australia’s is closer to the USA. Though, most people, even students, have to pay NZ$50 to see their doctor. (I wonder how that would go down in the UK.)

New Zealand’s politics has historically also been coloured by historic tensions between its indigenous population, the Maoris, and the settlers overwhelmingly of British origin who came here in large numbers from the 1840s onwards.

New Zealand’s second female Prime Minister, Jacinda Ardern (Labor) is going on maternity leave after her visit to the Commonwealth Heads of Government Meeting (CHOGM) which culminates today in Windsor. During her absence, Winston Peters MP (Foreign Minister and leader of the populist New Zealand First party) will become acting Prime Minister. Mr Peters is a Maori and this will be the first time a Maori has been accorded the country’s top job. In many ways his elevation symbolises the advancement of his people. After years of strife and recrimination, thanks to accommodating politics, the race war is now over. New Zealand can claim to be a benchmark in how a multi-ethnic society can thrive.

New Zealand can claim to be a benchmark in how a multi-ethnic society can thrive.

There are many differences between Australia and New Zealand – as well as many similarities. Apart from the differences in climate, one major difference is in terms of the condition of the indigenous peoples in each country. In Australia one gets the sense that Aboriginal Australians have never recovered from the arrival of the Europeans in the late 18^th century. One sees Aboriginals sitting in town centres looking, frankly, lost.

The condition of the Maori in New Zealand is quite different. Fiercely proud of their heritage and culture, which they celebrate enthusiastically, Maoris, who make up nearly 20 percent of the population (depending on how you categorise ethnicity – self-identification is the norm here), are fully engaged in New Zealand society. They are successful businesspeople and extraordinary athletes (as any rugby fan knows). It is even becoming normal for progressive politicians to call the country by its Maori name – Aotearoa.

A green country – in all senses of the word

Earlier this month the New Zealand government announced the end of new offshore oil and gas exploration. This was a triumph for Green Party leader James Shaw, who is Minister for Climate Change in the coalition government. His aim is that by 2050 New Zealand will not use any fossil fuels at all.

As part of the coalition agreement put together last October, a NZ$100 million fund has been set up to finance new renewable energy projects. The forthcoming Zero Carbon Act will reform New Zealand’s carbon emissions trading scheme. Westpac (ASX:WBC) last month published the Climate Change Impact Report which modelled two scenarios for moving to a low carbon economy. It concluded that adopting a more proactive approach could add NZ$30 billion to GDP growth over the next 20 years.

Don’t miss Victor’s next piece in the next edition of Master Investor Magazine – Sign-up HERE for FREE

Meanwhile, piles of plastic trash are building around New Zealand since the Chinese government banned the import of plastic waste into China for recycling. Customs figures show that 2.7 million tonnes of plastic waste were sent to China in the first quarter of 2017[i]. Increased shipments of waste materials to Thailand, Indonesia and Malaysia have taken some of the waste destined for China, but New Zealand will have to recycle more of its own waste – or reduce consumption. Both issues are high on the agenda.

Trade tribulations: From TTP to CPTTP

On 13 April President Trump suggested that America might re-join the Trans Pacific Partnership (TPP) which he had described as a “disaster” during the presidential election campaign. This is probably a defensive move by the Trump administration to ensure that US farmers get access to the markets of the eleven TTP members. It is also intended to boost US influence in the Asia-Pacific region at a time of great power rivalry. Events, however, have moved on since Mr Trump first turned his back on the TTP after his inauguration early last year.

The eleven TTP partners – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam – signed up to what is termed the Comprehensive and Progressive TTP (CPTTP) late last year. At least six of the accord’s signatories must ratify the agreement before it can come into effect. Once that threshold is met the agreement will be enforced 60 days after they have notified New Zealand – which is the official repository of the treaty. New members can only join if all existing parties agree.


Last week New Zealand Trade Minister David Parker said that there has been no official notification to New Zealand that the US wants to join the CPTTP. New Zealand’s Labor-led coalition government has viewed the protectionist noises coming out of Washington with concern. They also strongly disapprove of the withdrawal by the US from the Paris climate accord. On balance though, New Zealand would probably welcome the return of the prodigal to the TPP. On a visit to Berlin on Tuesday (17 April) Ms Ardern suggested that America would have to re-apply “like any other country”.

But then Mr Trump might change his mind again.

A trade deal with Europe?

In Europe this week Prime Minister Ardern’s main focus was on the prospective free trade agreement (FTA) between New Zealand and the EU. This was top of the agenda during her meetings with President Macron in Paris and Chancellor Merkel in Berlin. Germany appears to be enthusiastic but the French have reservations about letting the Kiwis compete directly with their farmers.

New Zealand imported NZ$8.9 billion worth of goods – mostly manufactures, especially vehicles – from the EU last year. It exported somewhat less than that – overwhelmingly foodstuffs. Both parties hope that negotiations can begin towards the end of this year but the European parliament has to give its consent first. An EU commissioner may be despatched to New Zealand as early as June.

Removal of tariffs on New Zealand exports would obviously be beneficial but FTAs are about much more than tariffs. The final deal will involve alignment of policies on climate change, labour standards, health and safety, animal welfare – and so on. There are also issues around ownership of real estate by foreign persons. New Zealand is also concerned about how WTO quotas will be divided between the EU and the UK post-Brexit.

The question for Dr Fox and British trade deal gurus is how New Zealand could feasibly negotiate a trade deal with the UK at the same time as the country is negotiating one with the EU.

As of 29 March 2019 the United Kingdom will be free to scope FTAs with countries outside the EU – though not to sign them until after the implementation period ends on 01 January 2021. The question for Dr Fox and British trade deal gurus is how New Zealand could feasibly negotiate a trade deal with the UK at the same time as the country is negotiating one with the EU. Until the terms of the British trade deal with the EU are crystal clear, it is likely that New Zealand will give priority to the EU deal. No doubt Monsieur Barnier has thought of that already.

But off-stage noises at the CHOGM has given hope to those of us who favour some kind of broader partnership between the CANZUK nations (Canada, Australia, New Zealand and the UK) which all share pretty much identical legal and political systems and security interests. I’ll have more to say about that shortly.

Housing bubbles?

What is it about Anglo-Saxons that wherever they live they are obsessed with house prices? Having come from Australia, where a minor dip in house prices is the main topic of conversation, I arrive in New Zealand – a nation traumatised by an ANZ (ASX:ANZ) report which predicts that NZ house prices will fall by 2 percent this year. That is in contrast to a rise of 6.6 percent last year.

Although – as in Australia and the UK – demand for housing continues to outstrip supply, due to tighter lending restrictions (e.g. loan-to-value limits) and affordability constraints thanks to low wage growth, getting a mortgage here is becoming more difficult. These tighter lending conditions have come about because the Reserve Bank of New Zealand (RBNZ – the central bank) was concerned about overly-rapid credit growth.

On the upside, there is less chance that interest rates will rise here in the immediate future than in neighbouring Australia. The RBNZ, as expected, kept its cash rate at a record low of 1.75 percent last month. It has been at that level since November 2016. Poorer than expected GDP growth figures for Q4 2017 and subdued inflation suggest that no rate hike is imminent. Yesterday (19 April) Statistics NZ announced that inflation had dropped to 1.1 percent – the lowest level since September 2016 – despite a rise in petrol and tobacco prices. (Smokers beware: a pack of cigarettes here costs NZ$35 or about £18!). The government’s decision to give new university students one year free of tuition fees saw the tertiary component of the Consumer Price Index fall for the first time since 2003.

Don’t miss Victor’s next piece in the next edition of Master Investor Magazine – Sign-up HERE for FREE

Another factor driving house prices is that the population is growing rapidly, mostly due to immigration. The population rose from 4.242 million recorded in the 2013 census to an estimated 4.874 million at the end of 2017 – a rise of nearly 15 percent in four years. In the year to March 2017 New Zealand welcomed a record 129,500 new migrants though 57,600 people left the country making a net figure of 71,900[ii]. Almost three-quarters of all migrant arrivals in the past five years were foreign citizens, led by United Kingdom (10 percent), India (10 percent), and China (9 percent). The loss of educated young New Zealanders, however, who leave the country – mostly to the bright lights of Australia but also to the UK and to America – is a controversial issue here[iii].

On the downside, there are severe skills shortages in the construction sector leading to delays in home-building projects. And while non-resident foreigners can buy property here at present (no end of A-list celebrities are rumoured to own ranches on New Zealand’s beautiful South Island including John Travolta and Johnny Depp) the Labor-led coalition government is proposing to ban real estate purchases by non-residents in order to subdue house price growth.

A shallow stock market

The 12-month chart of the NZX is heartening – up about ten percent. But this last month or so has been a roller-coaster. Old market hands can take volatility; what is more concerning is that this small market (by international standards) is getting even smaller.

Last week two major NZX listings announced their intention to de-list and an upcoming star announced its take-over by a foreign entity. Trilogy International (ASX:TIL) is to be acquired by CITIC China Capital Partners (HKG:0267) and Happy Valley Milk announced that it was to get a backdoor listing on the Australian Stock Exchange (ASX) in Sydney through LongReach Group (ASX:SGO). Meanwhile, branded apparel manufacturer Icebreaker, which was expected to list on the NSX, announced that it was to be acquired by North Carolina-based US fashion giant VF Corp (NYSE:VFC).


The NZX announced some generally disappointing proposals last week as to how to improve market liquidity at a time when smaller exchanges around the world are selling out to larger ones. Last month the Irish Stock Exchange (ISE) in Dublin was acquired by Euronext (EPA:ENX). And the Tel Aviv Stock Exchange which has a much larger market capitalisation than the NZX is expected to be snapped up by a global bourse any time soon.

Last week the NZX had a market capitalisation of US$99 billion. That is likely to get smaller as companies migrate to the ASX or are acquired by overseas buyers. Wellington-based Trans-Tasman Resources, which has been established to mine iron-bearing sand off the Taranaki coast (a move much opposed by Maori fishermen), announced its intention to spurn the Auckland exchange and to backdoor list on the ASX via Manhattan Corp (ASX:MHC). Another blow last week was that Vodafone NZ CEO Russell Stanner said that an NZX listing was sometime away.

A further issue for the NZX, according to Brian Gaynor of Milford Asset Management[iv], is that it is extremely difficult to find good independent directors for listed entities in New Zealand. Private equity funds, he says, offer shareholders better valuations than a stock exchange listing.

Numerous large international investors are reluctant to trade through the NZX’s two-tier market structure.

Numerous large international investors are reluctant to trade through the NZX’s two-tier market structure. The largest market is where brokers facilitate trades off-market without offering these trades to on-market participants. The other market is through the NZX where offers and bids are available to all on-market participants. This two-tier system, says Mr Gaynor, can lead to price manipulation, a lack of transparency, low liquidity and limited broker competition.

Most Australian money men and a few in New Zealand believe that the best option would be to merge the NZX with the ASX. But then, many Australians believe that New Zealand would be better off as Australia’s eighth state. I’ll explain in next month’s magazine article why that is just not going to happen.

Top-end tourism

I will also discuss in my forthcoming magazine piece how New Zealand has emerged as a top-end tourist destination – especially since the Lord of the Rings film cycle which was filmed in the stunning scenery of New Zealand’s Southern Alps (which I have just traversed). The country is attracting huge numbers of high-spending visitors now from the USA and (inevitably) from China.

As regular readers will know, I never go on holiday – I just do dry old economic research on the ground. I must dash as I’m visiting a winery to investigate another burgeoning sector of this amazing country’s growing economy. Always happy to share tasting notes. Cheers!

[I] NZ’s growing rubbish mounds, Herald on Sunday, page 11, 15 April 2018.

[ii] See: http://archive.stats.govt.nz/browse_for_stats/population/Migration/IntTravelAndMigration_MRMar17.aspx

[iii] A graduate student who left the country for ten years without paying off his student loan was recently given a hefty prison sentence when he returned!

[iv] Week brings bad news for the NSX, Weekend Herald, 14 April 2018.